A Theory of Demand Shocks

Guido Lorenzoni ()

American Economic Review, 2009, vol. 99, issue 5, 2050-84

Abstract: This paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity. Agents are hit by heterogeneous productivity shocks, they observe their own productivity and a noisy public signal regarding aggregate productivity. The public signal gives rise to "noise shocks," which have the features of aggregate demand shocks: they increase output, employment, and inflation in the short run and have no effects in the long run. Numerical examples suggest that the model can generate sizable amounts of noise-driven volatility. (JEL D83, D84, E21, E23, E32)

JEL-codes: D83 D84 E21 E23 E32 (search for similar items in EconPapers)
Date: 2009
Note: DOI: 10.1257/aer.99.5.2050
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Citations: View citations in EconPapers (344)

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Working Paper: A Theory of Demand Shocks (2006)
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